A mathematician plays the stock market by John Allen Paulos

All those who invest their hard-earned money in the stock market should be concerned with the truth of falsity of the efficient market theory random walk.

According to many scholars who have studied financial data, stocks and the stock market tend to move randomly. All relevant information about a company or the economy as a whole is reflected in the current price. The purchase of stock of one company is similar to making a bet in a casino. You win some, you lose. Eventually, the transaction costs of paying your broker will be more than erode profits.

Therefore, the best way to play the market is that of acquiring an index of how large the SandP 500. You will then profit as all stocks go up gradually due to the long-term growth of the U.S. economy.

However, most of the people who risk their money in the stock market have never heard of. Many have heard of, but I do not think it applies to them. Most people still pay brokers, read the newsletter, listen to and invest in cable TV shows. That is, they still believe - or someone whose advice they listen - can "beat" the market.

As a mathematician, Paulos brings the perspective of a qualified maths question. But much of the value of this book derives from his experience as a stock investor who is completely sucked to lose a lot of money on one of the high tech / telecom giants of the late bull market of 1990-2000, which went bankrupt with the revelation of massive accounting fraud - WorldCom (WCOM symbol).

So Paulos shows a lot of common mistakes investors, using himself as a bad example. How WCOM price has dropped, kept buying. She bought the margin and, as the price continued to fall, met margin calls. He bought calls. He spent hours and hours of his life in discussion forums on the Internet writing and reading messages about WorldCom.

So his mistakes inspired him to write this book examines the stock market and its behavior is part of both his professional and personal experience. He informed speculation about the value of fundamental and technical analysis (or value) stocks analysis. He gives the standard random walk theory to explain why these techiques can not make long-term investors more money than simply buying and holding index funds.

He gives an explanation of standard random walk for investors like Warren Buffett, who have long records of beating the market - are simply Tossers coins that happen to have a long list of money winners run. If enough people flip coins, most will average results, but the laws of the State likelihood that someone could flip an extremely large number of heads or tails.

This is true, but it seems awful funny that people like Warren Buffett, Peter Lynch and others that have proven records of beating the market are also people who work very hard.

It 's no coincidence that the most famous coin-flipper of all, Warren Buffet, was a hard working business man as a kid? That saved his money through his childhood, then studied investing as if his life depended on it, and who knows more about most companies than any other 5 stock analysts? What law of business balance sheets more than most of us, read emails?

My explanation is this: the ability to choose the winning titles is the ability of the innate, part of the intelligence, ability, analytical part, the motivation to learn everything possible, and so on. These skills are high, the correlation is not random with the proven stock-picking record of those who possess these character combinations.

The features more motivation for the choice of winning titles are distributed randomly among the population as is intelligence. But only few people have enough of these traits, plus a sufficient justification, the more opportunities enough (Buffett would have been very successful if he had taken in the college class of Benjamin Graham?) To beat the market. (Buffett has not only class Graham, Graham was the only student ever given to an A).

Paulos explains how artists can use with Internet chat rooms to "pump and dump" and "short and distort" to defraud investors. They choose a subtle negotiation, penny stock companies. They buy a lot of parts of it. Then they use a variety of names for access to spread rumors and talk about how great the company and as the stock price is going to go to the moon, and so on. Once enough people have bought the stock to increase the price substantially, fraudsters sell their shares at a handsome profit. They can also do the same in the short selling of shares in a company and then down to talk over the Internet.

This book is not light reading. Sometimes it does not explain the math as I wanted. Be prepared to think much.

Towards the end of the book, Paulos makes an interesting point regarding the possibility of buying stocks that have been fraudulently misrepresented - that does not change the odds. Think about this - you've got to bet on a coin toss. You know money is influenced, but I do not know if it is rigged to be heads or tails. Your odds of winning are still 50-50. Because you can choose either heads or tails and the coin toss of the coin could be bias.

His point is that you can buy or sell a stock short, and if there is any fraud involved, you do not know which side is driving the stock.

This is an academic abstraction, in my opinion. In the real world, most people buy shares (or go long), rather than sell short. Moreover, in the real world, if the records of brokerage may be suspected that it would be much easier to say you bought Microdotcom to 10 cents, in the hope that he would go up to 15 cents, rather than explain why you sold short Microdotcom hoped that would be dropped from 10 cents. I doubt that many brokers also allow you to sell short shares of the type of very small companies that are subject to fraud on the Internet that goes down their stock prices.

Moreover, since only a few people relatively few shares Microdotcom country to begin with, it must convince a significant fraction of them to sell their shares. It would be much easier to convince a large portion of the millions who have not yet purchased the company to buy some of its parts.

So I am sure that many investors are convinced of being burned by the pump and dumpers to invest on the long side being burned by short and distorters that convince them to sell short.

In addition, the fraud associated with WorldCom, Enron, Tyco and other companies like it has nothing to do with internet cons. Leaders who manipulate the stock prices of their companies do to get rich with stock options. Which excludes rigging the books to make companies look less profitable.

(This form of double accounting does not exist, but especially in the single owner and partnership, where the owners want to reduce taxes that they pay.)

So I feel positive that fraud in the real world investors on the long side burns far more than it does soon. Therefore, the price manipulation, if done by fraud or by corporate executives, you're more likely to distort the price "efficient" market of a stock at higher than the low side.

Paulos has a less adversarial stance against fraudulent business executives of many writers. While he must accept responsibility for their mistakes, as an investor, and has made many, detecting fraudulent financial reporting in the deception was impossible for him.

It 's too bad Paulos does not take into account the obvious solution: If you had invested for income, would never buy WorldCom, in the first place. That would protect him from all the companies accounting fraud because the executives are so busy tearing the company and inflate the stock price to profit from stock options, do not want to pay the company's profits as dividends to shareholders of the company merely .

Investing for income is saved by John Maynard Keynes famous "beauty contest" analogy. Years ago, British newspapers ran beauty contests where they released the images of many women (stock), and readers could vote on who was better looking (buying those most likely to rise in the price). However, the voter had only to win the one that best predict the winner of the pageant. (You make money in the market by predicting that many other investors will buy shares of a company, thus increasing the price.) Guess wrong about what other investors think a stock, and no matter how "nice" society is what about you - the price goes down and you lose money.

Boards of directors who love them enough to pay their shareholders dividends, are much less likely to be cooking the books. And even if they are, can not be on such a grand scale, because they still have to pay a little 'real, hard cash. And even if the price is finally going down, at least shareholders cash dividends.

Do not invest for dividends - that was biggest mistake Paulos' as an investor, but makes no mention of learning that lesson.